Chinese Economy Sends Mixed Messages, Up or Down?

What is the real truth about China’s economy? On the positive side, the March Purchasing Managers’ Index (PMI), which is issued by the National Bureau of Statistics and China’s logistical federation, rose to a one-year high of 53.1. This rise indicates that China’s economy is expanding. On the negative front, a manufacturing index issued by HSBC (HBC) and Markit Economics, a market survey firm in the U.K., showed that export orders had continued to fall for the past five months in a row.

However, both of these indices require further analysis and interpretation. A London-based research firm, Capital Economics, notes that the official PMI is biased towards the larger Chinese companies, and the HSBC index gives more weight to smaller firms.

The official PMI sub-index for large firms rose from 50.9 to 54.3. On the other hand, the small-firm sub-index dropped from 55.2 to 50.9. This would partially explain why the HSBC/Markit index fell.

Capital Economics notes the rise in the official PMI could be too optimistic because it reflects a seasonal increase that typically occurs in March of every year rather than an actual improvement in economic conditions. The PMI has never declined in March of any year.

The decline in the HSBC/Markit index may be a result of tighter credit to smaller firms and a decline in trade volume with their largest export customers in Europe, which is struggling with a debt crisis. Foreign investors believe that the Chinese government favors state-owned enterprises over private and foreign companies for allocation of capital and loans.

In an opening speech at the Boao Forum, Li Keqiang, the current Vice Premier and likely next Premier of China, spoke both positively and negatively about China’s economy. He noted that a full global economic recovery will be a long and arduous process. However, he insisted that the fundamentals of the Chinese economy remain strong, and economic growth will maintain its momentum. Li expects development to be relatively quick and steady.

During an interview with Bloomberg Television, Bank of Israel Governor Fischer observed that every time China has faced challenges to its growth, the country has responded quickly and growth has resumed. China set an economic growth target of 7.5 percent for this year, down from 8 percent in previous years.

Vice Premier Li Keqiang emphasized the need for China to continue to open up its economy. The dismissal of Bo Xilai, the previous Chongqing party secretary, is an indication of this policy, because Bo Xilai favored more state-controlled industries and fewer reforms for the Chinese economy. Li believes that China must adapt to the changing domestic and international economies, make the necessary reforms to open up China’s markets and eliminate the institutional obstacles that obstruct the shifting growth model. Li wants to make the expansion of domestic consumption a top priority.

Li indicated that the reforms should include finding better ways to more equitably provide financing to private and state companies, lessen the income distribution gap and expanded market roles to allocate all types of resources. He also stressed the need to provide stronger protections for intellectual property rights.

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